Getting Acquired: Industry Professional – Zach Vaninger (Part 2)

Episode 28

This episode is part 2 of 2, where we are joined by Mergers & Acquisitions specialist – Zach Vaninger.  Zach has spent a majority of his career in the world of Mergers and Acquisitions and has worked on transactions that total over $1 billion in deal value.  On today’s episode, Zach is going to share his thoughts on what a seller can do to prepare to get acquired and walk us through the process of selling a company.  

Things that can kill a deal

  • Seller’s revenue and/or profits drop while in the market, or worse, during due diligence.
  • Due Diligence Surprises.
  • Slow Responses.
  • Inaccurate Information.
  • Unrealistic Expectations.
  • Over-Negotiating.
  • Buyer Issues.
  • Outside Market Issues.
  • Partner/Stakeholder Disputes.
  • Not Ready Emotionally.

Strategic vs. Financial Buyers

  • Strategic
    • Strategic buyers are operating companies that are often competitors, suppliers, or customers of your firm. Their goal is to identify companies whose products or services can synergistically integrate with their existing P/L to create incremental, long-term shareholder value. In other words, their primary incentive for the acquisition is strategic, hence the moniker. These buyers can also be unrelated to your company and looking to grow in your market to diversify their revenue sources.
  • Financial

5 ways to find promising strategic buyers

  • Exhaust (And Don’t Miss) the Obvious Buyers
  • Think Outside the Box
  • Find the Active Buyers
  • Verify Ability to Execute
  • Stretch the Geography

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Zach 0:00
Find the active buyers. There are many companies out there that believe in a robust m&a acquisition strategy to grow their company and increase value for the shareholder. So, what I would advise potential sellers to do is find those players and reach out irregardless of size. If you’re the smallest guy in your industry, but you believe you have value to bring to the table, reach out to the corporate conglomerate, and start a conversation.

Intro 0:28
Welcome, everyone to the firing the men podcast show for anyone who wants to be their own boss. If you sit in a cubicle every day and know you were capable of more than join us, this show will help you build a business and grow your passive income streams in just a few short hours per day. And now your host serial entrepreneurs David Schomer and Ken Wilson.

David 0:51
Welcome everyone to the firing demand podcast on today’s episode we are joined again by Zach Vaninger for those of you who have not lived and tune in to part one of this episode getting acquired some practical guidance from an industry professional. This is part two of the episode. Just a little background on Zach. Zach has spent a majority of his career in the mergers and acquisitions world and has worked on a total of over $1 billion in deal value. Guess that’s billion with a B. On part one of this episode, Zach shared with us what a seller can do in order to prepare to be acquired and he also walked us through the process of selling a company. In today’s episode Zach’s going to talk about what can kill a deal and how to increase the value of your company. Stay tuned for Zach’s list of five ways to find promising strategic buyers for your business. This is an episode you will not want to miss. Welcome back to the show. Zach.

Zach 1:51
Thanks for having me back, David.

David 1:54
Absolutely. Now in part one of this show, we talked about what a seller can do together. acquired, we talked about the deal process and you made the the perfect comparison of the deal process being kind of, you know, like a dating or courting ritual. And now we need to know, you know, what can go wrong? And so I think that’s a perfect place to start. So in your experience, what have been some things that you’ve seen, that can kill a deal?

Zach 2:24
Yeah, there are there are a number of items that can kill a deal. And we’ll start with the most obvious and that is revenues or profits may drop off, whether that be a market condition, a company specific condition, or worse. It happens during the due diligence process. This can happen. And for perfect example, we’re looking at COVID-19, right. So there’s a massive economic and global event that occurs where revenue and profit drops and it’s not even your business’s fault. However, this is Ultimately can kill a deal. And so you have to be aware that this is a risk in a transaction. And anytime you can expedite a transaction process, that’s where you get investment bankers, you know, ready to go and fire it up. Every single day counts. And so the quicker you sign the close, the better off you are.

David 3:23
All right now, in your experience, what is like the perfect timeline, like if a deal were to be perfectly run very efficient, from the time you engage investment banker to the time of close what, you know, what would be a realistic expectation?

Zach 3:23
That’s a good question. And it depends on again, the the size and complexity of the business, but there are some investment bankers that will run a very expedited process, and that could be anywhere from, you know, assigned or indication of interest to close within a couple of months, maybe two to three months. Or it may be drawn out process where you’re looking at six to 12 months from that initial process where you engage an investment banker to close and again, it is dependent on a lot of conditions. So there are some processes that are run that may not even close at the end of the day.

David 4:19
Very nice, very nice. You know, you talked about revenue dropping off in and I, I kind of smiled to myself, if you were to look at my business last month, it was right in the middle of COVID-19. Everyone was in quarantine, and in my sales skyrocketed. It was an awesome month. However, Amazon quit letting us send an inventory for a period of time. Now I’m feeling that in my business as a huge negative. And so if you were to look at my business last month, that would have been the perfect time to close Right, right. This month, I’m down I look this morning, I’m down 34% month over month, and it all goes back to inventory. Fortunately, a lot of my competitors are in the same boat. But, you know, just because you had a good month this month does not mean that next month is going to be a slam dunk. And so I think that, you know, talking about the time of selling your business, I think that’s important. And, you know, based on what you said, or what I’m hearing is, the longer a process is drawn out, the longer things cango wrong, right?

Zach 5:26
Every single day adds incremental level of risk to the close the sale.

David 5:31
Okay, Okay. Now, what are some other things that can kill a deal.

Zach 5:36
Another thing and it’s very basic is slow responses and inaccurate information. a buyer when they sign a letter of intent, they are ready to go. They have ran their valuation considerations, and they know that they can well, the forecasts they can earn a return on the investment in your business. And so the slower that you respond as a seller more risk that you bring to the close of the transaction. And so you really want to ensure that you’re providing expedited quick information that’s accurate. And there’s no back and forth between buyer and seller. So we see a lot of times and I’m talking about my experience on the buy side right now, where a seller will provide very generic descriptions or responses to our diligence questions. And so, we may ask a specific question about their financial condition or what their projections look like for the next year. And they respond with very basic information, one sentence response, and we have to engage in back and forth information and the the less detailed you are the more uncertainty that has created in the buyers mind and so to eliminate that will help you avoid a potential situation where The buyer starts to question your responses.

David 7:04
I’m glad you brought that up as it relates to the timing, you know, a lot of business owners, they will spend 40 to 50 hours just trying to run their business, right? The daily grind of running a business. And when you add due diligence on top of this, or you, you add document requests and lengthy question lists, that adds a lot of time. And so, you know, I think that’s something that you should keep in mind that when you’re preparing to sell your business, it may be a good opportunity for you to carve off some of your daily tasks to somebody else. So you can focus on, you know, maximizing value throughout the deal process and giving detailed responses and being very quick to turnaround document requests. So that’s a that’s something that I don’t think a lot of sellers think about, but it takes a lot of time just to sell your business.

Zach 7:58
Definitely. And I think it comes back to expectations that may be set by good advisors. But it is ordinary to have at minimum 200 to 300 document requests related to due diligence that are coming from the buy side. And then sometimes you’ll get in situations where there are follow up questions to all those requests. And so sellers really need to be prepared to like I mentioned in Episode One, to have every rock Unturned in their business, because the buyer will want to know the interest intricacies of the business.

David 8:33
Alright, Zach, what are some other things that you’ve seen kill a deal?

Zach 8:37
I think there are some seller considerations that come up based on my based on my experience that I’ve seen that could potentially kill a deal. And first, it’s related to unrealistic expectations when going to sell your business. There are a lot of sellers that look at General investment and m&a notes and memos. About transaction multiples for example, and they see this very attractive multiple 10 plus times that they may get for their business. But there are very specific valuation tools that buyers use and use very specific industry guidance that may not result in the expectations that you have when selling your business. So it’s it’s very good to go into the process open minded and this again will come back to good investment advice is get a good investment banker to help you negotiate that that realm.

David 9:37
Glad you brought up expectations because I would say that when somebody especially if somebody starts a company, and it is their baby for several years and they are there, burning the midnight oil growing this company and and putting a lot of blood sweat and tears into it. Oftentimes they overvalue that company and I would compare it to a lot of parents and I’m the same way I have a seven month old son, a lot of parents think that their kid is going to be a Nobel Prize winner. And I think when you have skin in the game and you’re so close to something, it is very easy to have much higher expectations then what is realistic? And so you had mentioned some transaction multiples and for our listeners that are unfamiliar with that, can you give some some guidance on what exactly that is?

Zach 10:30
Yeah. So when I refer to transaction multiples, that is really the purchase consideration divided by your earnings. For example, if the purchase consideration is $10 million, and your earnings are $2 million, the transaction multiples considered to be five times and that will generally be referenced in the industry as five times EBITDA, which for those that are not familiar on on the podcast EBITDA is Earnings Before Interest tax depreciation and amortization. So those are going to be kind of your adjustments that you’ll make to net income to arrive at that earnins figure.

David 11:09
Absolutely. And one thing I just want to plug here, I was listening to a webinar the other day put on by Quiet Light brokerage, and they sell a lot of e commerce companies. And the metric that they were talking about is sellers, discretionary income. Very similar to EBITDA that Zach referenced, but for our e commerce crowd that, you know, so five times sde. Sellers, discretionary earnings would be the transaction multiple that he’s talking about. So, okay, so we covered that, what are some other things that can kill a deal.

Zach 11:42
so over negotiating, so if you’re not being represented by an investment banker, over negotiate, negotiating can be a point that comes up and really drives the buyer away. And then on the flip side, you may be at a acceptable valuation range, but then the only realizes for the seller realizes that they are not emotionally ready. And we have seen this come up numerous times in my transaction experience on the buy side where there is initial excitement and involvement and the sellers providing a lot of financial information and confidential information about their business. And they get to the point where the buyer offers them, let’s say for example, $30 million for their business, and they’re looking at a potential $30 million check, but they choose to walk away. And so that does happen. And I think that goes back to what we discussed in episode one. What are your goals? And are you ready to commit to this very lengthy and potential emotional taxing process?

David 12:47
So we’ve talked about some issues that come up on on the sell side, what about the buy side? What are some buyer issues that you see that kill a deal? For sure. That’s it. That’s a good point, David, and there are really three that I think are relavent here, versus internal approvals. At the end of the day, a buyer, especially a larger buyer has a lot of approvals that they have to have to go through. And that starts at the executive level, the functional level, and generally routes up all the way through the board of directors. So they have to get approval and all of those different levels to support the valuation. And so that’s one risk of a potential deal killer. Another thing is during that diligence process that we referenced in podcast, Episode One, there are many cooks in the kitchen upon on the diligence teams for these this buyer. And so you have to basically satisfy every functional diligence team, HR, legal, it, environmental health and safety, the financial folks. So there are a lot of people that need to sign off really, that the risks inherent in the deal are at an acceptable level. And then finally, There are due diligence surprises that can kill the deal. And that those surprises they can run the gamut, from the smallest little things to very significant items, but they’re very obviously deal specific. And there is always generally surprises just is that surprise at an acceptable level of risk? You know, those surprises always seem to be a surprise to the buyer and seller when you work and diligence. They don’t seem to be a surprise. There seems always always something there is something wrong in the businss.

Yeah, absolutely. I mean, there’s there’s always something that is, you know, there were many, you know, you started with a SIM, then you had management presentations, you’ve had a bunch of meetings, you think that there were plenty of opportunities to lay everything out. And you get to that final stage of due diligence after you have submitted your LOI and their support surprises and and I think the only people that are not surprised are probably the investment bankers but definitely the due diligence team, because it’s just another.

Zach 15:06
Absolutely, yes. And David, I did read a statistic, and I’m not sure how back this is, but I did read that 50% of deals fail during diligence. Wow.

David 15:16
All right. So Zack, I’ve heard you talk about like strategic buyers in financial buyers. Can you explain the differences and what is a strategic buyer and what is a financal buyer?

Zach 15:27
Definitely. So we’ll start with strategics and strategic buyers are operating companies that are often competitors, suppliers or customers of your business. Their goal is to identify companies who products or services can synergistically integrate with their existing business to create incremental shareholder value. In other words, their primary incentive for the acquisition is strategic. On the flip side, financial buyers include private equity firms also known as financial sponsors, and venture capital firms, hedge funds, family offices, and high net worth individuals. These firms and executives are in the business of making investments in companies and realizing a return on their investments. And that is really this distinctive point the the financial buyers are very ROI driven, where the strategic acquirers are more strategic synergistically interested.

David 16:32
So strategic buyers and financial buyers are going to come at this probably with a different approach. Can you discuss some of those diferences?

Zach 16:39
Yeah, for sure. There are different considerations that the seller should be aware of. And I think some of the more important ones that are relevant to the seller thinking about considering or selling their business is will the seller remain after the transaction for example, on a strategic buyer, they generally prefer that a seller stay on But it may not be certain. And so there are a lot of times where there is six to one year transition agreements in place, because the seller would like to exit. And so that’s generally accepted by a strategic buyer. However, on the flip side, when a financial buyer is acquiring a business, for example, a private equity firm, they generally want the seller to remain on board, because they do not have operational executives that are gonna come in place and manage the business, they really rely exclusively on the existing management team, to keep that business operational to generate those cash flows for as long as possible, and basically transition that business to the next layer of management. So that’s one consideration. Then another very important consideration that comes up a lot is how long will you own the acquired business and that’s referring to the buyer, but a strategic buyer, they’re going to own that business. Most Likely indefinitely, they’re going to roll that into their existing platform. And that’s just going to be a legacy company that adds to that existing portfolio. Whereas a financial buyer, again, they’re in it for the return on investment. And so typically, they are looking at a three to seven year holding period before seeking to exit that investment in your business and realize return. Another consideration is will you be involved in the day to day operations? So for a strategic buyer, I mentioned there’s that six to 12 month transition agreement? And the answer, the short answer, there is yes, in that short period of time, they are going to want you to really dive in and integrate that existing business into their operating structure. Again, that comes down to minimizing risk of a failed transaction for them. For a financial buyer, will you be involved in the day to day operations? Typically, no, you’re not interested? In running the day to day operations, and that’s generally why you sell your business to generate liquidity and, you know, pursue your goals outside of work. But you may take a seat on the board of directors and help define the next leg of growth and oversee more from a strategic perspective, that investment. However, as I mentioned, they still want you involved for a longer period of time. It’s just not you’re in the weeds running the business day to day. Another very important consideration that comes into play and we see this come up all the time in my experience as a on a buy side team is will you retain the employees of my business? And that comes down to the human nature of owners, they care about their employees. First strategic buyer, generally, the answer is going to be possibly a lot of people do not like to hear that but Strategic buyer, they’re really looking at synergies, as I mentioned, and what can they use their existing structure to basically cut costs and operating company more efficiently and save money and increase shareholder value. So you’ll typically see that a lot of the back office personnel, when being acquired by strategic buyer, are eliminated from your company.

David 20:31
You know, you saying that brings up this was a Bloomberg Businessweek magazine back when I used to get the magazine. I bet this was close to 10 years ago. And I can vividly remember this cover. It was of a it looked like a horror movie. It was a guy with a hockey mask and a chainsaw. And in like bloody letters, it said private equity across the top and it went into talking about A lot of stories about where private equity funds will go in, and as a strategic buyer, and they will really try to trim the fat in a business and cut costs where they can. And that’s not always the case. In fact, I would say it is more often not the case that people get let go. Then when they do get let go. However, that can happen. And I think that, you know, during the courting process of being a seller and finding a buyer, that should be something you should be bringing up is I care about my team, what’s going to happen to them. And to the extent that, that there’s a mismatch between what you would like to happen and what the buyer is proposing, then that conversation needs to happen early. So I’m really glad you brought that up.

Zach 21:51
Definitely. That is a very important consideration and it comes up all the time.

David 21:56
All right, Zack, any any final considerations as we’re talking Talking about strategic versus financial buyers.

Zach 22:02
You know, David, the last thing that I think is worth mentioning is will the seller retain any ownership because it’s an opportunity to create more value for yourself personally. And in a strategic acquirer of large corporation, typically, there’s typically not that opportunity, they’re going to pay you the purchase consideration from the deal. And they generally have their capital structure established. And there’s not very many opportunities to get involved in the business post close. For a financial buyer or private equity firm, they will offer incentives because they have as I mentioned, a short holding period to where if you can provide that expertise, and you could basically be put on an incentive plan Equity Plan and help realize the return on investment then there is that opportunity. This allows management to retain an interest in the business and it provides motivation for them to continue to grow the company.

David 22:59
Absolutely. That’s a good consideration because I think a lot of times people think I’m either going to sell all of my company or nothing at all. And oftentimes, you know, keeping a 20% or 10% stake in a company keeps the interest between the buyer and seller aligned, right, they both want to grow that company. And you know, from a seller standpoint, you know, the business, it’s your baby, and maybe you’re not, you know, ready to take a full step back. You know, in completely exit this company, there still could be an opportunity for you to earn a great deal of money, right, but still stay involved in the business and in the day to day operations. That’s a really good point. For sure. I am I would say I am within the next year going to exit one of my private label brands. And we save this piece for last and I’m super excited about it. Five Ways to find promising strategic buyers. Now I in a year will probably be shopping for buyers. So I’m excited about this list and let’s dive right into it.

Zach 24:05
Definitely, I think number one is exhaust. And don’t miss the obvious buyers. You know your market, you know your competitors, you know your vendors, you know, your customers. Every one of those individuals or businesses is a potential buyer. Do not eliminate vendors or customers because they may have vertical alignment strategies that you are not considering. They’re the experts in your industry. So definitely reach out, consider a conversation and stay involved in industry associations to get your name and your brand out there. The other thing I would mention on that point is talk to an investment investment banker with industry specific experience. So there are dedicated niche investment bankers for every industry out there and seeking good guidance for Your specific industry is a great way to help find those very promising buyers. Absolutely. The next thing I would consider is think outside the box. So we talked about kind of who are the obvious guys. But what capabilities does your business have that would enhance another business? It does not have to be in your specific industry. But let’s take an e commerce platform, for example. You may be or your business may have a very strong robust e commerce capability and capabilities an important point because that’s what some businesses are really looking for those capabilities in building an e commerce platform. However, they may not have it and they may be in a completely irrelevant industry, from your perspective, and you may think that they’re not interested in your business but in return They may only be interested in that capability, they don’t care what you’re selling, they care that you have a robust platform and capability that their business doesn’t have. So there’s value there. Even though you may think there’s zero

David 26:16
in bringing this full circle to e commerce, I think, you know, the first thing that came to my mind was a team. I mean, it is so important to have, you know, for Amazon, in particular, have someone that does awesome listings, and awesome videographer and awesome photographer, someone to run your PPC. And there are so many people that get into Amazon without that team. And so, you know, you may sell in the beauty products sector, and, but have a team that could do just a good job, you know, selling something in the pet industry. And those seem like two totally different things. But, but the process is the same, right, the photography’s the same. The listing optimization is the same So, I think that that’s, you know, when you mentioned that, thinking outside the box, and I think of my company in particular, there’s a ton of value tied up just in the team. I in boys, it takes a long time to get there. But I finally feel like I have an awesome team. And so I’m really glad you brought that up.

Zach 27:18
Absolutely. So next consideration is find the active buyers. There are many companies out there that believe in a robust m&a acquisition strategy to grow their company and increase value for the shareholder. So what I would advise potential sellers to do is find those players and reach out regardless of size if you’re the smallest guy in your industry, but you believe you have value to bring to the table, reach out to the corporate conglomerate, and start a conversation. I’m a deal guy in my current buy-side role, and we love hearing from the small guys in our industry. We’re always more than happy to start a conversation or listen to their valuation. proposition to see if they’re their company would fit into our portfolio. So never eliminate a potential buyer because of their size.

David 28:09
I’m glad you mentioned that because I think that that, oftentimes when you, especially starting out, you feel like a small fish in a giant pond and reaching out to a company that’s doing, you know, 10s of millions or hundreds of millions of dollars in revenue seems intimidating, but it doesn’t cost you anything to pick up the phone and call. And in oftentimes, I would say like a larger company is going to have a deal team, they’re going to have a team dedicated to m&a, whereas maybe a middle market or small company. It’s not going to have a designated deal team. And so I think when you call calling a larger company, you are more likely to have someone on the other end of the line that speaks your language, and is involved in the deal process and can get you a better answer.

Zach 28:59
So, my advice here, David, goes back to what we talked about in Episode One, related to the dating process, do not focus all your energy on one potential buyer, you don’t want to put all your eggs in one, one basket. So when you’re looking at companies and you’re trying to figure out whether they will be able to execute on this potential transaction, you really want to find one that you’re confident can close a deal because again, if you spend a six to 12 month timeframe, trying to sell your business to this, this entity, and at the end, they can’t get the approvals necessary required by their board. You’re out six to 12 months. And again, it goes back to every single day that you do not sell your business is another level of incremental risk related to the close. So I think that’s that’s an important thing to consider. And then stretch the geography. Do not Look for buyers that are in your very specific geographic area. In fact, I would encourage you to look almost globally, to be honest with you, David. It’s a global economy. And there are buyers in every neck of the woods, and especially private equity or some of the more financial buyers, they have means to close a deal and not be, you know, within 100 to 200 mile radius of your business.

David 30:33
I’m glad you mentioned that because most of our listeners are ecommerce sellers. And in when it comes to location, it does not matter. It does not matter at all, where you’re physically located in 99% of e commerce situations. And so I think that, you know, thinking outside your state, but as you mentioned, thinking outside your country, is a really important thing for you to do to potentially increase The value that you ultimately get out of your company.

So Zack, we end every episode with the fire round. So our first question What is your favorite book?

Zach 31:10
current favorite book is on fire by john O’Leary, who is the St. Louis motivational speaker that I saw in person actually have signed on fire book from him.

David 31:19
Yes, I will second that. That is an awesome book. And john is a spectacular guy. He’s got a podcast. We’ll put a link to it in the show notes. But that is an excellent read. And yeah, I would recommend that to everybody. Second thing what are you

Zach 31:35
hobbies? hobbies? Well, hobbies for me right now. Orange theory. That’s my newest hobby. Love it. Yeah. been kicking off the fitness routine with orange theory. And then recreational sports here and there with friends and home improvement. Yeah, I love it. Yeah, doing something at home, basically turning something that is that needs improvement. to, you know, a good clean finished product. I don’t know, I just there’s there’s something about it, seeing the work that you’ve done at the end of the day and making a difference that it’s it’s pretty cool.

David 32:13
I couldn’t agree more. All right, Zach. And finally, what do you think sets apart successful entrepreneurs from those that give up fail or never get started?

Zach 32:23
David, I think it’s be ready to embrace the unknown. I like it. I like it. sec. Thank you so much for joining us today. And how can people get a hold of you, dude, if you want to provide my email address in the show notes I’d be I’d be happy for people to reach out to me via email.

David 32:39
Awesome, awesome. Well, thanks for joining and thank you everyone for listening. We’ll see you next time. Thank you everyone for tuning in to today’s www.Firing The podcast. If you like this episode, head on over to www.Firing The And check out our resource library for exclusive firing demand discounts on popular e commerce subscription services. That is www.Firing The You can also find a comprehensive library of over 50 books that Ken and I have read in the last few years that have made a meaningful impact on our business or that head on over to www.Firing The Lastly, check us out on social media at www.Firing The you know, on YouTube at www.Firing The for exclusive content. This is David Schomer and Ken Wilson.

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